How much is your Bulgarian company worth?

Company valuation in Bulgaria

The purchase of the house

Once the money is on the account of the company, the company purchases the house and now it has the real estate on its balance sheet. But it also has a 300 000 EUR liabilities towards the foreigner, the sole shareholder of the company. Hence, the total value of the company is roughly zero.

The sale of the shares of the Bulgarian company

For whatever reason, the foreigner decides to sell his shares to a Bulgarian national. He is poorly advised by his accountants/lawyers that the value of the company is equal to the value of the house. In other words, 300 000 EUR. And this sounds logical to someone who has no accountancy background or knowledge of the Bulgarian legislation. After all, there is a company that holds a house, worth 300 000 EUR. The “credit” is due to the shareholder, so it is easily forgotten and disregarded. All in all, we have a company that holds a property worth 300 000 EUR, so the company should cost 300 000 EUR, right?

With all that in mind, the foreigner has signed a contract with the Bulgarian national and has sold his shares for 300 000 EUR. Additionally, as the Bulgarian didn’t have the funds at the moment, the sales contract foresees that the money will be paid in instalments with 5% annual interest. All this looks logical, as the buyer is paying 300 000 EUR, but he gets a company that holds a house for the same amount. What he doesn’t realise though is that the company owes this money to the ex-shareholder. So let’s see now what is wrong with this sale.

The consequences

Let’s assume that the buyer and the seller are in good terms. This means that the company will not need to pay back to its ex-shareholder the 300 000 EUR credit. If this was not the case, the buyers would have been defrauded. But this has never been the intention of the seller. So we won’t talk about paying the credit back by the company to its ex-shareholder. Problem solved. Unfortunately there are other problems with this sale though.

Anti-Money Laundering (AML) issues

The first (out of many) problem is the problems for the buyer to justify the legal sources of the 300 000 EUR, that he will be paying for the company shares. If the buyer has funds from verifiable sources, the problem can be mitigated. But even if this is the case, an inspection by the AML authorities is never a pleasant experience. If the buyer is receiving any financial benefits, such as unemployment pay, the purchase of shares for such amount can cause him serious problems.

Tax liability

Here we start talking money. First of all, the foreigner incurs huge tax liabilities to the Bulgarian tax office. The amount of 300 000 EUR, even if not received immediately from the buyer, is taxable under the Bulgarian law on personal taxation. The profit that the ex-shareholder realises is equal to the difference between the sale price and the “cost” of the company. This will be explained further in the article.

The final tax and the taxable amount

A final tax shall be levied notwithstanding the circumstances referred to in Article 13 on the income referred to in Art. 8, par. 11 and the following income from a source in Bulgaria, accrued/paid to foreign individuals, when not realised through a fixed base in the country:

income from the sale, exchange and other remunerative transfer of shares, units, compensatory instruments, investment vouchers and other financial assets, with the exception of the income from exchange referred to in Article 38(5).

art. 37, par. 1, p. 12 of the Bulgarian law on personal taxation

The income from the sale of shares of a Bulgarian company to a Bulgarian national/resident certainly qualifies as “from Bulgarian source”. So let’s now see what the taxable amount will be:

The final income tax under par.1, p. 12 shall be determined on the positive difference between the sale price and the documented acquisition price of the assets.

art. 37, par. 4 of the Bulgarian law on personal taxation

In our case, the final income is equal to the difference between the sales price and the documented price for creating the company. The documented price is only 51 EUR. This means that the taxable income will be equal to 299 949 EUR.

It is eventually possible that the final income can be reduced by 10%, but this is very questionable and uncertain. Please contact us for further details about this legal option.

The tax rate (10%)

And finally, the law stipulates what the tax rate is:

The tax rate shall be 10 per cent for the income referred to in Article 37 and Article 38, par. 5, 8, 11, 12, 14 and 15.

art. 46, par. 1 of the Bulgarian law on personal taxation

With all that being said, the foreigner, the seller of the shares will owe to the Bulgarian state 10% from 299 949 EUR.

This results in a tax liability for the foreigner in the amount of 29 994,90 EUR. This is the amount that the foreigner needs to pay to the Bulgarian tax office. Horrible, isn’t it.

And according to art. 67, par. 1 of the tax law, this tax shall be paid by the person who acquired the income by the end of the month following the quarter of acquisition of the income. In other words, if the sale of the shares has occurred in March 2025, then the tax must be declared and deposited by April 30th, 2025.

More tax liabilities

The tax liabilities don’t end up here though. Another liability that arises for the foreigner is from the interest payments that he is entitled to, in accordance with the sales contract. Based on the tax rate of 10% and 5% interest on the 300 000 EUR credit, this will result in a tax liability of 1 500 EUR per year. If instalments are made, this will decrease the tax liability accordingly.

Reporting compliance

This sale of shares will also result in huge administrative load on both the buyer and the seller. They must start submitting, at least, the following declarations and statistical forms.

For the buyer (the Bulgarian national and resident)

• Annual declarations as per art. 50 of the personal tax code about the obtained credit from the foreigner in relation with the purchase of the shares. Even if the buyer is not filling annual tax declarations until now, he will have to file them from now on in order to declare the credit;
• Annual statistical forms SPB-8 to the Bulgarian National Bank in order to declare the credit for statistical needs. This is regulated by Ordinance 27 of the National Bank.

For the seller (the foreigner)

• Quarterly declarations for the obtained interests on the credit. At the same time, the tax on the interest needs to be paid;
• One time declaration for the sale of the company shares. At the same time the tax of 29 994,90 EUR must be paid as well.

Possible claims towards the company from creditors of the foreigner (the seller)

Another eventual problem may arise from eventual claims by third parties against the foreigner. Suppose the foreigner is sued by business partners or ex-spouse. In this case, the credit he has granted to the company may be seized. The company will then owe the money to the foreigner’s creditors (ex-spouse, etc.) and if it fails to pay the 300 000 EUR back, the house will be seized as well.

The solution

As you can see, poor financial and tax planning can have dire consequences. If the foreigner had come to us earlier for advice, all these problems would not have been created. Unfortunately, the damage is already done.

So is there a solution to this problem if the contract is already signed? There is no easy answer. If the parties amend the contract now, this may be considered as an attempt for tax evasion. If they try not to pay the tax and/or submit all declarations, they may be criminally prosecuted. All in all, if approached proactively, a suitable solution can be found. But it will take a lot of brainstorm to reduce the damage already done.

If you have questions or you need additional information, please don’t hesitate to contact our offices in Sofia.